Gross Domestic Product Aims and Calculations
Gross domestic product is a measure used to capture the total market value of all goods and services in a country. For its calculation, goods intended only for the final consumer are considered without considering raw materials for production. GDP is combined from the financial fortunes of various sectors of the economy and is, in fact, the numerical equivalent of the status of the economy in a country. By translating the GDP of two countries into one currency, one can compare their well-being since the growth and quantity of GDP determine the turnover of capital and the country’s development. Stable GDP growth means the citizens’ growing economic well-being and the country’s progress. A larger GDP implies the emergence of new economic sectors, industries, and enterprises, as well as an increase in the number of goods produced. All this flowering of the production of goods also means the demand for new jobs, which increases the level of professional employment – a vicious circle is obtained in which the well-being of the country’s inhabitants increases.
However, cases of GDP growth are also possible, which do not necessarily guarantee the growth of the country’s well-being. GDP can increase sharply due to rising prices while maintaining or reducing production volumes. However, this indicator will not reflect the country’s economic situation decline. Nominal GDP is a calculation that is measured in prices of the period under review, dependent on market price fluctuations (Mankiw, 2018). Real GDP measures the physical volumes of goods for a specific period and is calculated through the prices of the previous period. Real GDP does not depend on the rate of inflation, and price fluctuations are not taken into account in its calculation.
Mankiw, G. N. (2018). Principles of macroeconomics. Cengage Learning.